PZ Cussons Nigeria: FX-related losses weigh on 2018 outlook

Monday, January 22, 2018 /11:40
AM /FBNQuest Research2018E EPS decline of -53% y/y driven by fx-related
lossPZ Cussons Nigeria (PZ) posted H1 2018 (end-Nov) PBT of N869m vs –N425m
in H1 2017; the result beat our estimate by 36%. As such, we have raised our
EPS forecasts by around 5% over the 2018-20E period. A favourable price volume
mix in both the Personal Care and Home Care categories continue to drive
sustained sales growth. Looking ahead, we note that the business environment is
becoming more competitive and consumer demand remains soft following
significant cost inflation in recent quarters.Following discussions with management, we believe that PZ’s White Goods
segment and sales of bulk milk due to pricing pressures are likely to continue
to struggle in the near term. We also understand that naira credit availability
which was tight in H1 2018 (end Nov) may persist through the year. However, we expect already rolled-out
initiatives at the start of H2 2018 (end-May), which is PZ’s peak season, such
as distribution expansion and new product launches will help to improve
performance during the period.We forecast sales growth of 21% y/y to N96.1bn. However, we forecast an
EPS decline of c.-53% y/y to N1.69 in 2018E due to the adverse impact coming
through from fx-related losses this year. PZ posted fx-related losses of
-N2.6bn in H1 2018 alone. Excluding fx-related losses, EPS growth was 36% y/y.
Our new price target of N20.5 is up 24% and implies a downside potential of -7%
at current levels. Our new PT is driven by market-reflective adjustments to our
risk-free rate and equity risk premium assumptions.While we lowered the former by 150bps to 14% we cut the latter by 50bps
to 6.0%. We have also rolled forward our valuation to 2019. In 2017, PZ shares
appreciated by +42%, in line with the broad market. We retain our Underperform
rating on the stock. PZ shares are trading on a 2018E P/E multiple of 13.0x for
average EPS growth of 5% y/y over the 2019-2021E period.Q2 2018 PBT up 73% y/y to N1.1bnIn Q2 2018 (end-Nov), while sales of N22.2bn grew 42% y/y, PBT and PAT
were up 73% y/y and 110% y/y to N1.1bn and N628m respectively. Gross margin
expansion of +172bps y/y to 28.5% and the topline growth delivered during the
period more than offset negatives coming through from a double-digit y/y rise
in opex and an fx-related loss of –N779m, leading to the PBT growth. The fx
loss compares to a loss of –N1.8bn in Q1 2017 (end-Aug).Following the Q1 results, management had guided to more fx-related
losses during this financial year on account of fx-denominated account
payables. PZ has now delivered topline growth for 5 consecutive quarters since
Q1 2017. This confirms our view that management may have found a winning
formula for its product price-volume mix.